Young Drinkers Try Pricier Wines, Let Constellation Ditch Plonk

Jan. 18 (Bloomberg) -- San Francisco wine collector Julie
Crabill canceled more than half of her eight wine-club
memberships during the recession. Now that the economy is
recovering, so is her spending.

“Because we wanted to save money and because we felt like
it was the responsible thing to do while everyone else in the
world was tightening their belts, we cut back,” said Crabill,
34, who runs marketing communications firm Inner Circle Labs
with her husband, Jon Neri. “Toward the end of 2010, we added
August Briggs, which is a pinot house, to our roster, and
Domaine Carneros champagne.”

The wine industry expects fellow drinkers will follow suit.
Sales of bottles over $20 slumped during the past two years, as
consumers flocked to cheaper alternatives. Now, as the economy
recovers, consumers are starting to spend on pricier bottles.
That bodes well for winery owners such as Constellation Brands
Inc. and Diageo Plc.

“I saw a lot more champagne sales this holiday season,”
said Amy Currens, sommelier at Prospect, an upscale restaurant
in San Francisco’s South of Market neighborhood that serves, on
average, 260 diners a night. “People are willing to spend money
again. They’re not completely shying away from it like they were
last year.”

Total U.S. wine sales rose 4.1 percent to $9.32 billion for
the 52 weeks ended Dec. 11, according to the most recent data
from Nielsen Co. The fastest-growing segment was wine priced at
$20 and up, with sales gaining 11 percent. Wines under $3
declined 0.6 percent.

‘Trading Up’

“What we’re seeing is that people are trading up from
value wines,” said Jay Wright, president of the North American
wine unit of Constellation Brands.

The company -- which was the world’s largest winemaker
until last month, when it sold its Australian operations for
$290.1 million -- has been shedding its so-called value brands,
or wines that sell for $3 and less, for the past two years. It’s
now focusing on premium labels, such as Robert Mondavi, Clos du
Bois and Ravenswood, ceding the title of largest winemaker to
E&J Gallo Winery.

Investors are still waiting to see positive results. After
reporting third-quarter sales earlier this month of $966
million, 2.7 percent less than the average of eight analyst
estimates in a Bloomberg survey, shares plunged the most in
almost two years.

Still, the world’s major winemakers are following
Constellation’s lead after an acquisition binge over the past
decade. Diageo -- owner of the Beaulieu, Rosenblum, Provenance
and Sterling labels -- said last year it was cutting jobs at its
U.S. wine division and might sell brands and vineyards as it
scales back the business to trim costs. In July, it sold its
Bordeaux wine holdings.

Luxury Brands

Brown-Forman Corp., the maker of Jack Daniel’s whiskey,
said last month that it may sell a piece of its wine business,
including its Fetzer label. The company will keep its Sonoma-Cutrer brand, whose bottles generally sell for $20 or more.

“When you look at businesses like Saks and Nordstrom --the
luxury retailers -- they had a good year,” said Rob McMillan,
founder of the wine division at Silicon Valley Bank, a unit of
Santa Clara, California’s SVB Financial Group. “Fine wine falls
into that category.”

According to Constellation’s Wright, some of the biggest
buyers of fine wine are the “millennial” generation, consumers
in their 20s and 30s who make up the biggest age cohort since
the baby boomers. They’re drinking more wine than previous
generations and aren’t afraid to pay for quality, he said.

Millennial Marketing

“It’s important to realize how big the millennial group of
folks is, those between 21 and 30,” he said. “There’s 50
million of them in the United States, and there’s going to be
another 25 million hitting legal drinking age in the next three
to four years.”

Constellation has put together a special team of millennial
marketers to work on digital-media advertising. Campaigns
include a Facebook page for Arbor Mist, a blend of wines and
fruit juice, which the company claims has become the largest
wine community on the social network site, with more than
260,000 people saying they “like” the brand; and a YouTube
video contest for its Black Box line of wines that are packaged
in plastic-lined cardboard boxes instead of glass bottles.

“We’re trying to take advantage of younger consumers, and
their interest in what I would call more whimsical brand
ideas,” Wright said. Rex Goliath, a lineup of wines that sport
a large rooster on the label and sell for less than $10, has
“been on fire” with millennials, increasing sales by 80
percent, he said.

‘Still Seeking Values’

To be sure, most drinkers aren’t flocking back to their
old, pre-recession spending habits just yet, said Jon
Fredrikson, president of Gomberg, Fredrikson & Associates, wine-industry consultants in Woodside, California.

“Consumers are generally still shell-shocked and still
seeking values,” he said.

Sellers of wines for about $10, such as Gallo, still will
be successful after attracting drinkers who traded down during
the recession, he said.

Consumers purchased an increasing amount of wine from
Argentina and New Zealand, both of which gained more than 24
percent in sales last year, according to Nielsen. Australian
wines declined 7.3 percent and French wines fell 6.4 percent.
Pinot noir, riesling and sauvignon blanc all rose more than 9
percent, while chianti fell 5.5 percent and syrah or shiraz
dropped 8.3 percent.

Gallo, which owns 60 brands including Carlo Rossi, Louis M.
Martini, Rancho Zabaco and Turning Leaf, said sales in
restaurants “outpaced the industry,” according to an e-mail
from Stephanie Gallo, vice president of marketing. The company’s
Barefoot label, which sells a variety of bottles for less than
$11, is rapidly expanding its retail sales.

“We fully anticipate that this trend will persist for
years to come and demand for these wines will continue to
grow,” Gallo said.